Shares eye record high as Fed heads for 2017 hat-trick

LONDON (Reuters) - Global shares were
within a whisker of another record high on Wednesday as markets traded
on expectations of a third U.S. interest rate hike this year and waited
to hear from the Federal Reserve on how many more are likely in 2018.

Solid gains in Asia overnight had inched MSCI's 47-country world index
<.MIWD00000PUS> up for a fifth day running and while the pre-Fed
anticipation meant Europe's main bourses were barely budged, there was
action elsewhere. [.EU]

A technical glitch on futures markets made for a stuttering start to
European government bond trading, while the dollar was down against the
yen, pound and euro after President Donald Trump saw his already-wafer
thin U.S. Senate majority cut further. [FRX/]

It fell as far as 113.12 yen as Democrat Doug Jones won a bitter fight
for a Senate seat in deeply conservative Alabama, in a race marked by
sexual misconduct accusations against Republican candidate Roy Moore.

The upset makes Jones the first Democratic senator from Alabama in a
quarter of a century and will trim the Republicans' majority to just
51-49, meaning it could be harder for Trump to advance his policy
agenda.

"The big issue now is whether Republicans will push through their tax
bill before Christmas," said Sue Trinh, head of Asia foreign-exchange
strategy at RBC Capital Markets in Hong Kong.

"And more broadly, U.S. dollar bulls will be more worried that this
marks a Democratic revival into 2018 mid-term Congressional elections."

S&P e-mini futures <ESc1> were down as much as 0.1 percent after the
election outcome, though they clawed their way back to flat in European
trading to be broadly in line with the region's STOXX 600 index <.STOXX>.

The Alabama vote temporarily took the spotlight away from the Fed, which
is widely expected to raise rates later to between 1.25 and 1.50
percent, which will be its third hike of the year and fifth since the
financial crisis.

OppenheimerFunds strategist Brian Levitt suspects the Fed will also
revise up its growth forecast, adding upside risk to the "dot plot"
forecasts on interest rates, though he does not expect as many hikes
next year as some economists.

"We are going to see a Fed that continues to attempt to tighten policy
next year," he said.

"But fortunately with inflation low in the U.S. the Fed has the cover to
go slowly... I know people have hopes for the tax cuts (planned by
Trump), but I don't think they will be able to push ahead with 3-4 rate
hikes."

The dollar index, which tracks the greenback against a basket of six
major rival currencies, was down 0.1 percent at 94.01 <.DXY>, pulling
away a high of 94.219 touched on Tuesday, which was its highest since
Nov. 14.

A pedestrian stands to look at an electronic board showing the stock
market indices of various countries outside a brokerage in Tokyo,
Japan, February 26, 2016. REUTERS/Yuya Shino

Against the euro it was flat at $1.1740 <EUR=>, while the 10-year Treasury yield
<US10YT=RR> stood at 2.41 percent after falling to a session low of 2.389
percent after the Alabama election news.

FED UP

Divergence between Fed and ECB policy was supposed to be bullish for the dollar,
given it had widened the premium offered by U.S. two-year yields <US2YT=RR> over
German yields <DE2YT=RR> to 256 basis points from 188 basis points this time
last year.

The last time the spread was that stretched was in 1999.

Yet the euro is currently up 12 percent on the dollar this year while the dollar
is down 8 percent on a basket of currencies <.DXY> - an indication interest rate
differentials aren't everything in forex.

"Everyone is standing on the sidelines," DZ Bank rate strategist René Albrecht
said as German 10-year Bund yields hovered around 3-month lows. [GVD/EUR]

Gold was near its weakest level in almost five months at $1,242.18 an ounce. It
is often seen as a safe-haven play and can perform poorly when central bank's
like the Fed feel confident enough to raise interest rates. [GOL/]

(Additional reporting by Lisa Twaronite in Tokyo; Editing by John Stonestreet
and Hugh Lawson)